'Shadow' home inventory could burden U.S. housing agencies, watchdogs say

May 30, 2013|Reuters

WASHINGTON, May 30 (Reuters) - Millions of U.S. homeownersare months behind on payments on government-backed mortgages,raising the risk federal housing agencies will end up facing thecost of managing a fresh flood of foreclosed homes, twogovernment watchdogs said on Thursday.

Some 2.7 million borrowers have missed several payments onmortgages backed by the U.S. government, the inspectors generalof the Federal Housing Finance Agency and Department of Housingand Urban Development said in a joint report.

These loan delinquencies represent a "shadow inventory" ofhomes that could hit the market if foreclosed on, which wouldneed be managed by government-run Fannie Mae orFreddie Mac, or some other federal housing agency.

"Not only are current REO inventory levels elevated ... theymay rise over the next several years depending on the number ofshadow inventory properties that are ultimately foreclosed on,"the report stated.

Since the housing market boom and bust, the government hasemployed billions of dollars to help borrowers manage high-costloans and stabilize neighborhoods hit by foreclosures. FannieMae, Freddie Mac and HUD, which oversees the nation's mortgageinsurer, the Federal Housing Administration, have been burdenedwith a glut of repossessed properties as a result of the housingmarket collapse.

Not only does the government need to cover maintenancecosts, it also needs to hire real estate agents and contractorsto rehabilitate and sell the homes. Finding cost-effective waysto deal with the supply poses a challenge, the report said.

"These networks require significant oversight to ensure thatthey perform effectively and that they mitigate both REO-relatedexpenses and foreclosure's negative effects," the report stated.

The report said the shadow inventory, which is made up ofloans that have been delinquent for at least 90 days, is morethan seven times the inventory of REOs that Fannie Mae, FreddieMac and HUD currently own.

"Even a fraction of the shadow inventory falling intoforeclosure could considerably swell ... inventories of REOproperties," the report warned.

Fannie Mae, Freddie Mac and the Federal HousingAdministration are backing about nine out of every ten new homeloans. Fannie Mae and Freddie Mac owned about 158,000 REOproperties at the end of September 2012, while HUD had about37,000.

HUD, Fannie Mae and Freddie Mac have all taken steps toshrink their REO inventories, the report noted. Fannie Mae hasalready launched a pilot program to mitigate the costs offoreclosures, auctioning off some of its properties in bulk toinvestors with the intention to convert them into rentals.